cost accounting meaning

cost accounting meaning

The Significance and Applications of Cost Accounting in Modern Business Operations

1. Introduction to Cost Accounting

In this chapter, we will focus on the process of bringing together cost accounting, which includes various methods for collecting information from business transactions and using that information in reporting, non-routine decision making, and in the way managerial resources are allocated. However, allocating resources requires a system to formalize and operationalize the thinking and decision-making process. The issue is managed by managerial accounting. It is an activity related to the management function. Managing is the responsibility of managers at all levels. The character of management accounting is shaped by the decisions facing the manager at several organizational levels. From cost accounting, there are many subsystems that are developed to support management objectives. These include timekeeping, payroll, inventory management, purchase requisition, cash budget, marketing statistics, and so on. In this chapter, we provide an internal use of reporting information, the nature of various cost accounting information, and financial accounting’s role in providing this data to support the business processes in a typical organization.

Cost accounting has been the backbone of decision-making activities throughout the world. The need for cost accounting and cost accounting techniques has increased over a period of time. Cost accounting makes a significant contribution to the operation and management of a business. Cost accounting is a system of accounting that makes suitable arrangements for the collection, classification, summarization, and allocation of the costs of producing and delivering products to the customer. A modern cost accounting system gets input from financial accounting, which leads to the creation of reports necessary to determine performance with respect to cost. Moreover, cost accounting plays a vital role in the management of a business organization. The performance and decision making of a business are highly influenced by cost accounting. The decisions would either be based on cost accounting reports or make use of data that would be processed by cost accounting in order to generate decisions suitable to an organization.

2. Key Concepts and Principles of Cost Accounting

Cost accounting uses historical costs to determine the actual costs of services or products provided. Also, it has been said that cost accounting focuses on the cost of the use of resources in a company. It is useful for maintaining financial records, and it is also particularly important for planning business operations and performance evaluation. It assists in the formation of an appropriate pricing policy, in reducing operational costs, and in providing an even flow of production capacity, among others. The reasons for the implementation of cost accounting systems differ from one company to another, but their application is increasingly important in view of economic fluctuations and the increasing complexity of business transactions.

Cost accounting is defined as the process and technique of the quantitative and qualitative ascertainment of costs. It has been defined in various ways, with its meaning viewed at different levels. However, we shall confine our definition to that which focuses primarily on business concerns. Cost accounting is a process of the use of accounting techniques and procedures for ascertaining the cost of products and services, and/or for planning, controlling, and reducing the cost of processes or operations.

Meaning and business application of cost accounting

3. Methods and Techniques of Cost Accounting

(b) Terminal Costs Accounting and Forecasting: After the initial historical costs accounting or ascertainment of costs have been completed, there are then provided terminally such other costs accounting or cost reporting statements, tables, charts, graphs, cost estimates, and specialized cost comparison and variance reports or cost receipts as would be the most useful to managers and executives in their task of cost effectiveness controls, cost-independent decision-making, cost planning, and cost optimization. Typically, the cost accounting terminus and forecasting are necessary to provide information, to meet the needs and requirements of external financial reporting influences, such as relevant laws, regulations, standard generally accepted accounting principles (GAAP’s), specific trade policies, ordered official taxing or regulatory authorities, or specific investing or charitable donating interests.

(a) Historical Cost Accounting or Ascertainment: This is also called “recording” or “control” of supplying the various necessary subsidiary books and ledgers or cost accounting systems that will separately list and make necessary records of the materials costs, labour costs, and overhead service costs (as are defined and encompassed under the classifications of prime, direct, indirect, variable, fixed, production, non-production, manufacturing, selling and distribution) made useful in the production of the various products and services by means of warranted costing systems jointly developed by the cost accountant and the other executives and unit managers.

The various methods and techniques of cost accounting can be accepted as commonly applied in the following accounting system:

4. The Role of Cost Accounting in Decision-Making

A business is forced to make a lot of complex decisions within its framework every day. Since decisions depend on information, the volume of information generated by cost accountants is an essential part of the decision-making process. The information has to cover areas such as regular reporting of operations, investment decisions, pricing decisions, business planning, and so forth. Many gut feelings and intuitive decisions result from a lack of information or from the quality of the information available. Nowadays, decisions have to be very precise, and to produce precise information, scientific methods may be used. It is the duty of cost accountants to produce information that is relevant, reliable, precise, and generally accepted intellectually to suit management decisions. It has to be produced timely. Accounting information is input data of the accounting information system. It is information relevant to economic decision-making. Accounting, therefore, is an information system aimed to supply economic information by recording, classifying, and summarizing. Cost accounting data must thus be provided to serve the purpose for which the information system is designed.

Cost accounting provides crucial information for decision-making processes. However, its application is most felt and fulfills the needs of the modern competitive business world at the management level, compared to government departments, non-profit making institutions, public corporations, academic institutions, and other institutions. The reason seems to be that these institutions do not have the primary objective of profit realization that management has. In management, cost information is required to make many decisions since business is dynamic and decision situations are prevalent. However, in these non-profit making institutions, the process might be dominated by political influences and vote-seeking early decisions. In public corporations, cost accounting information is required due to increasing business-oriented attitudes. Some applications of cost accounting in management’s different decision-making areas are discussed below.

5. Challenges and Future Trends in Cost Accounting

This paper focuses on providing comprehensive applications for business managers so that they, with their staff, can customize the most suitable cost accounting for their businesses. Nevertheless, difficulties and challenges are always problems experienced by managers. In the last section, we discuss the future trends and possible applications of cost accounting. According to long-term case studies in the trend tracking of reported management accounting applications, we also offer future trends and encourage the development of cost accounting. In doing so, organizations can create a business execution with (1) reduced checking, (2) increased customer satisfaction, (3) better procedures, routines and rules, and (4) increased accuracy and higher expressiveness.

To summarize, the purpose of this paper is to clarify the different functions of cost accounting as a portion of management accounting, to show the significance of cost accounting in three different aspects, to display the motivations for using cost accounting in business operations, to reveal the contact relationships between cost accounting and current managerial activities, and finally to relate necessary knowledge to the design and management of contemporary cost accounting.

Unified and standardized definitions of cost accounting represent the fundamental premise for the development of modern cost accounting. However, the lack of standardized definitions for cost accounting, which has resulted in a lack of understanding of terms as well as the typical stereotype idea that cost accounting is only for temporary purposes, presents huge obstacles to its development. For the future development of cost accounting, it is necessary to clarify the definitions of cost accounting, which will also aid the comprehensive development of management accounting and further its comprehensive applications.